More manufacturing, fewer jobs. Is there a solution?

Manufacturing makes more products than ever before, but not the jobs that once went with them. How can struggling economies resurrect their rust belt regions when factories employ more machines than people?

In a cavernous building on the outskirts of Sydney’s CBD, a lone worker tends to a massive printing machine churning out 70,000 magazines an hour.

Not so long ago, it would have taken six workers to do the job, but advances in technology and automation mean printers at Blue Star Web are able to produce more with less than ever before.

Such machinery does not come cheap. Blue Star has four of the German-made machines, each costing A$10 million, and it has just spent A$12 million to import and install the most up-to-date version.

For companies operating in Australia’s small but highly competitive printing industry, such investments, although costly, are essential if they are to remain in the game.

As the ranks of mass-market publications have thinned, Blue Star has adapted its operations to make producing small print-run magazines financially viable.

It is a familiar story across manufacturing.

To stay competitive, companies are investing in technologies that allow more to be produced with less labour, raw materials and energy, and producing less waste. This is good news for consumers, who are able to buy more things, more cheaply, than ever before, but it also means manufacturing is no longer the engine of employment it once was.

The Trump promise

In many countries, services have more than taken up the jobs slack. Globally, the proportion of workers employed in the services sector surged from 32 per cent to more than 50 per cent between 1994 and 2010. However, factory closures have hit particular regions hard, with some startling consequences.

Donald Trump’s triumph in the US presidential election owed much to his ability to tap into the disillusionment and resentment felt by communities battered by such change.

One of his boldest promises, and one that undoubtedly helped him secure crucial support in the manufacturing-heavy rust belt states such as Michigan, Pennsylvania and Wisconsin, was to bring back millions of manufacturing jobs that had been lost in the US in the past decade.

To help deliver on his promise, Trump has appointed Australian-born Dow Chemicals chief executive Andrew Liveris to chair his American Manufacturing Council.

“You can revitalise foundation industries, and your poster child is Dow,” he told The Australian Financial Review soon after his appointment was announced in December.

“We’ve taken chemicals and advanced the technology to materials and value-added products.”

He is unabashed about the need for strong state intervention to make it work.

“Building integrated industrial sectors based on competitive inputs does need sound policymaking in partnership with the private sector,” Liveris told The Australian. Lower taxes and cheap energy are “critical” to investment and making the US competitive with lower-cost rivals.

Steadily losing ground

Even if Trump and Liveris are able to boost manufacturing activity and investment, will that in itself deliver the jobs Trump has promised?

Economists and industry experts very much doubt it, and it is not hard to see why. Across the world, measures of the economic heft and job-generating power of manufacturing are all pointing in the wrong direction.

Although the world is making more things, more cheaply, than ever, manufacturing is losing value. World Bank data shows manufacturing’s share of global output has shrunk in the past 20 years, from more than 21 per cent to less than 15 per cent, and is still tumbling.

“Manufacturing is no longer the engine of employment it once was.”

The experience of some countries long considered behemoths of manufacturing is stark.

In 1997, manufacturing accounted for 17 per cent of British output – two decades later that has slipped to 10 per cent. In Germany and Japan, whose post-war prosperity was built on manufacturing, manufacturing’s share of GDP has slid from highs of 32 per cent (West Germany) and 35 per cent in 1970 to 22 per cent and 20 per cent respectively.

China, the so-called “factory of the world”, no longer relies on manufacturing as it once did. From a peak of 40 per cent of GDP in 1978, manufacturing now accounts for less than a third of China’s output.

Australian National University economist Peter Drysdale says China’s shift of emphasis towards consumption-led growth is driving big changes in the structure of its economy.

“The rust belt in northern China is being replaced by the tech belt in the east and south as the fulcrum of Chinese growth,” Drysdale says.

“Massive adjustment in industrial structure and employment is taking place across the country.”

The wrong diagnosis

In high-income countries, manufacturing’s relative decline in value terms has been accompanied by the haemorrhaging of jobs. In the US, while manufacturing output has increased by 80 per cent in real terms in the past 30 years, the sector has shed about 7.5 million jobs over the same period.

It is a trend President Trump has pledged to reverse and he has already started to exert pressure on US manufacturers. Before being sworn in as president, he browbeat air-conditioning company Carrier into abandoning plans to shift production and 2000 jobs to Mexico. Car makers Ford and Fiat Chrysler announced multimillion-dollar US investments around the same time as critical Trump tweets.

Central to Trump’s campaign pitch was his promise to ensure the US got “a better deal” from the world on a number of fronts, including trade – even proposing punitive 45 per cent tariffs on cheap Chinese imports.

“The number of robots being made will more than double in the next 10 years.”

However, is he aiming at the wrong target?

Research by Ball State University economist Michael Hicks suggests so. In his 2015 study, The Myth and Reality of Manufacturing in America, Hicks estimates just 13 per cent of the 5.6 million manufacturing jobs lost in the US between 2000 and 2010 were caused by competition from cheap imports and the relocation of operations to lower-cost countries such as China and Mexico.

Hicks argues the biggest cause of job shedding has been improvements in productivity driven by changes in technology and processes. Across the US manufacturing sector, he measured a 67 per cent increase in productivity in the first decade of this century, including a massive 350 per cent jump in the productivity of computer and electronics manufacturers.

The result has been a huge hollowing out of manufacturing jobs. “Had we kept 2000 levels of productivity and applied them to 2010 levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million,” Hicks writes.

Here come the robots

We may only be in the early stages of a huge change in the way things are made. Justin Rose, a partner at Boston Consulting Group, argues we are reaching an inflexion point in the widescale adoption of robotics in manufacturing.

Robots are not as ubiquitous as they are often portrayed. While 229,000 industrial robots were produced in 2014 and about 1.4 million industrial robots are currently in use worldwide, according to the International Federation of Robotics, they are concentrated in a narrow range of industries, including electronics and automobile manufacturing.

Cost and capability have so far limited the extent of their use. However, Rose says advances in technology mean robots will become much cheaper and be able to do an increasing range of tasks.

He expects the number of robots being made to more than double in the next decade and four million to be installed in factories by 2025.

By making workers more scarce on the factory floor, Rose says such automation will erode the competitive advantage of lower-wage producers in China and elsewhere, making it increasingly viable for manufacturing production to be returned to the US and other Western economies.

Increasing automation and other technological advances, such as 3D printing, may make advanced-economy manufacturing financially viable, but it’s unlikely to provide the jobs bonanza President Trump and other policymakers are looking for. The paradox they face is that the feature which makes manufacturing suitable for reshoring – a low labour component – is the very one that cruels their ambition for restoring millions of manufacturing jobs.

Our bespoke future

Australian medical device company Oventus Medical has begun producing sleep apnoea devices customised to the shape of a patient’s mouth from a 3D printing plant in Melbourne, Victoria.

Meanwhile, down the road in Geelong, Carbon Revolution has pioneered the commercial production of carbon composite wheels for cars, and Tullamarine-based Textor Technologies has developed an absorbent filler for nappies.

For CSIRO deputy director Cathy Foley, this is the future of manufacturing in small market countries such as Australia.

Even as companies shut down big factories and shift jobs offshore, manufacturers using technology to provide customised products, or who make technically advanced goods that feed in to global supply chains, are prospering.